In the 1960s, office culture called for business-formal attire, martini lunches, and the rise of the cubicle.
With the ’80s came the first Apple computer, the 9-to-5 mentality, more casual dress codes—and bigger hair.
By the 2000s, smartphones, open floorplans, and (eventually) The Great Recession dominated the American workplace.
Fast-forward to 2021. With the global pandemic largely to thank, people are working differently than ever before, and remote work has become mainstream.
But one thing has not changed over the past sixty years: we all still need a place to work.
Investing in Office Real Estate
Some companies are maintaining office space and getting back to the usual routine. Others are creating hybrid programs, making the office available while allowing continued work-from-home flexibility.
As you consider the effects of this past year, you might wonder if office real estate is a good fit for your investment portfolio. Analysts expect the global office real estate market to fully rebound over the next few years, making now a good time to evaluate your options and seek out solid investment opportunities. But first, we thought it best to give you a quick rundown of this sector and the options you may come across.
Types of Office Space
When you think about office real estate, your mind might go straight to something like this: harsh fluorescent lighting, rows of cubicles and a pitiful break room. But the office sector extends far beyond that outdated depiction. It serves everyone from large corporations to sole practitioners and small family-run businesses.
Beyond staff size, investors in this space benefit from tenants in diversified industries thanks to the varied types of businesses that use it. For example, a single office building could play host to:
- Traditional office space (with conference rooms, executive offices, and a “bullpen” for staff
- Creative office space with collaborative and/or open-air work areas and customized spaces for design, production, sound studios, etc.
- Shared/coworking spaces
- Life science labs
- Medical office space
Office Space by Class
Depending on your goals and interests, you can choose to invest in different classes of office real estate, which may vary greatly between regions. Generally speaking, offices are graded as A, B, or C based on their function and amenities.
As with most real estate, another defining feature is location, location, location. Say you have two similar properties, but one is in the financial district downtown while the other is situated in the suburbs. Which do you think will fetch higher rents?
This class of office space is the most luxurious, offers the best amenities, and is typically located in the most desirable parts of the city (e.g., within historic buildings or at coveted downtown addresses).
Tenants are often willing to pay a premium for higher-quality space for their employees. Some have a concierge or other on-site services, all of which increase their attractiveness and improve rentability.
Nice and reliable, though usually a bit older than Class A, these offices are typically in a good location but may not have all the latest bells and whistles. Class B buildings provide reputable, no-frills spaces for companies just starting up or who want to keep overhead lower.
This class includes assets that may have seen a few more years (often 20+) and need a facelift—if not a sizeable renovation. Another scenario is that they may be similar to Class B in quality but located in less desirable areas. They tend to attract tenants such as non-profit organizations, new entrepreneurs, or solo practitioners.
Pros & Cons
When companies invest in office space, they are often willing to sign longer leases. Most fall within the time frame of 5-to-10 years, sometimes even longer. For example, medical office space can drive longer leases because of the extensive buildout required to equip the space for such specialized use.
This level of tenant longevity can reduce the stress of frequent turnover and vacancies. However, when a tenant’s lease does end, investors may need to prepare for more extensive (and expensive) renovations.
Medical office space is the most likely to require an expensive turnover, but any business with specialized buildouts will take some additional time to get ready for a new client.
A syndicated investment in office real estate can be profitable if you know your niches—which type of office space appeals to you and which type appeals to the customers you want to attract. A trusted sponsor can help you find the answer to both questions.
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